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angry tapir (1463043) writes "The Australian Securities and Investment Commission (ASIC), a government financial watchdog, is reportedly contemplating the idea of implementing a 500 millisecond delay on trades in an effort to put the brakes on high-frequency trading. ASIC last year knocked back the idea and stated that fears about HFT were overblown. However, in a government inquiry today representatives of the organization said the idea of a 'pause' is still on the table."

If you simply change everyone's temporal frame of reference by the exact same amount, you have done nothing, really. Everyone will simply account for the 500ms delay, and trades will still execute in the same order.

The way I understand it is that traders (computers) have to hold on to shares for a minimum of 500 ms, which means that whatever the market does in those milliseconds cannot be acted upon. However, others can act in the meantime.

Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).

I don't pretend that this plan is waterproof. I'm sure someone will shoot a big hole in it in the replies below... I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

There's basically 3 types of information for traders:1. Official public information from the company itself (press releases, annual report, etc).2. Analysis by external parties3. Unofficial (non-public) information from within the company - trading using this is called insider trading, and this is already against the law.

So, when companies release information (category 1), everybody can trade. I do realize now that large companies have press releases on a daily basis. So, maybe the timespan of a week/month

Even the 500ms won't work. HFT have a lot of infrastructure and resources. You can simple model your HFT in a way that there are two entities trading, one buys it, if the HFT system decides to sell it and is restricted to do so for 500ms or a week, the other entity shorts the same trade, in effect achieving the same results. IMO, you should be allowed to short trades along with this 500ms block for this to properly work.

Obviously, you can have multiple entities trading on behalf of the HF Traders.

I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

I purpose the the stock market should really go back to its roots, and that every share should be attached to a genuine item of stock - be that cow, pig or chicken. And that you are responsible for housing and feeding all the stock that you own.

This would also have the interesting effect of changing our perception of Bull and Bear markets.

The problem with requiring someone to hold onto shares for a specific amount of time is that it doesn't prevent HFT but instead adds a barrier to entry. If I buy 5 shares of IBM but then must wait a week before I can sell those 5 shares what prevents me from selling these other 5 shares I bought last week? If there was a company that held several stocks that were readily trade able other people could contract selling the shares & replacing them for a nominal fee. This would be similar to shorting sto

Well let's say you want to buy a share, who do you buy it from? Or let's say you want to sell a share, who do you sell it to?

It used to be you'd actually have to find someone to step in and take the contra side of your transaction. That's a pain in the ass, will cost you time and money, and in the event you need to sell and everyone else wants to sell you're screwed. All of this would mean that unless you had lots of money to invest, the stock market was not for you.

Fast forward to today. We have people willing to take a position, any position. They provide "liquidity" for the market by buying the share you wanted to sell, in the hopes that they can turn around and sell it for a fraction of a cent more when someone comes along with a buy order. They actively manage their inventory of shares (yes that's a thing), and adjust prices in the event information comes out causing a large price change in the shares.

This is a service that needs to continue if you want modern markets to maintain their efficiency.

Now here's the problem. Back when the "marketmakers" were actual human beings buying and yelling at each other in trading pits one would not be substantially faster than another. But, using computers, there's an arms race for speed. If you can get a few miliseconds (or even nanoseconds) faster than your competition, you can take all of the profitable orders. This means if you plough enough money into speed, you can just own the market. In addition, because computers are so fast, your computer can make many millions of silly trades before a human trader can push the big red stop button.

Now a solution needs to come about. But, because of the need for market makers speed can't really be limited to holding onto shares for months. (Sorry). 500 ms basically breaks the arms race since it's a very easy speed to obtain. So, you can't just plough money into being the fastest kid on the block.

The important issue is the ratio between investors and speculators. You need speculators in the market to provide liquidity, but you don't want too many because liquidity is the positive spin on volatility. If you have too high a ratio of speculation to investment then the market becomes completely decoupled from the thing it's trying to represent and it becomes a dangerous place for investors (and companies) because they can lose all of their money as a result of something completely unrelated to the actual profitability of the company. If you have too few speculators, then it becomes difficult to buy and sell shares.

The problem with HFT is not really HFT itself, it's that it magnifies the effects of speculators on the market, meaning that you need far fewer speculators with far less capital to have a disproportionate effect on the functioning of the market.

This is currently the problem. Zero liability currently. There have been a number of LARGE examples of this, where things have gone awry, and the company loses like 500 Million. The response has been to halt trading, and reverse all the trades. To me this is cheating. They may have lost, but that just means that someone else was the winner.

If people want to use these methods, then they take the risks. They don't get to call a "redo" because things didn't work out in the way they thought it should.

After a couple of big losses like this, people might think twice about using such a service, or at least account for it within their threshold of risk. They do not own a licence to make money.

This "liquidity" is a vague term used by high speed traders to justify their poaching of legitimate trades. What they really mean is that they increase VOLUME of trades. What they are doing is intercepting a trade and getting in a buy or sell first. So they double the number of transactions. However the individual investor holding onto a stock that wants to be able to sell it does not gain any extra ability to sell (liquidity) because of these extra traders, and is very likely to be gaining less money because of them.

This is not a service that improves the system, it is more like a parasite that feeds off of the system.

I used to work for a high frequency firm, and I can tell you the downwards strategy is as important as the upward strategy. While in theory it is true that potential gains on the upside are unlimited and potential gains on the downside are limited to the share price this presupposes that a stock price can go to infinity. Realistically, this is not true, and realistically barring a catastrophe a stock does not go to zero. Even then a stock does not go to zero immediately when becoming worthless (see Dead Cat Bounce [wikipedia.org])

HFT is focused in on short term moves. On a short period of time, say the order of seconds, it will dominate. On a longer period of time, say hours, days, or weeks, investor sentiment will dominate. Even when HFT goes completely wonky and accidentally manipulates the market, over a period of days investor sentiment will still dominate.

Additionally, stock ownership represents ownership in an underlying company, that on average will experience growth. As profits grow, the value of the shares grow. Therefore growth in the present value of stocks is the natural state. Additionally, while you might take the counter argument that not all stocks should grow, most indices will cut out underperforming stocks. Therefore, an index is a bad indicator for the stock market at large because you are artificially selecting for winners and losers.

I agree this would seem like a good solution. Perhaps lowering the limit to a day or an hour though to keep things fluid. As long as the time period is considerably longer than the communication delays you've removed a lot of the ways in which HFT can game the system. A short enough time period would also pretty much remove any major advantages to "resetting the clock" - Yeah, it sucks if you bought stock in a company ten minutes before the factory catches fire, and will have to wait for another 50m befor

Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).

A week or a month might be a bit too long, but something along the order of 1-5 minutes might be reasonable.

Alternatively, one might also have the exchange do batch orders: traders submit their orders to the exchange, the exchange groups them all together, and then processes them all periodically (say, every 30 seconds or something), then displays the results. Since the results are not released until after the batch is fully processed there's no advantage to submitting an order at 29.999 seconds compared to

Imposing a tax only means the profit threshold is raised. That creates the market distortion called "arbitrage", where the relative costs between different transactions are not symmetric.

A.01% tax per transaction would mean that for me, a small trader, there would be a net loss unless my own profit per trade is lower than.01%. For a bigger trader, the cost per trade is lower, therefore they would gain and advantage over us, the smaller guys.

It would be better to have random delays introduced from 0-30s, which causes out of order sequencing on trades, making HFT relatively unreliable and unusable, since the high speed links currently used to facilitate those ms advantages will be entirely negated.

The way I see it, you can eliminate the advantages of HFT while keeping the markets highly responsive by imposing a "clocking" scheme on exchanges. When an order is received by an exchange, it is not executed immediately but stored in a queue to wait for the next clock tick. When that comes, the order queue is shuffled into random order and then executed sequentially. Make the clock ticks wait a random period between 40ms and 50ms and any timing advantage of HFT or geography is nullified. The exchanges are still highly responsive; they just do randomized batch processing. All of the requests they receive in the previous clock period ought to be processed within the new clock period (with perhaps some occasional spill-over, in which case the new clock tick is stretched).

I gather the best way to 'encourage' investors to aim for long term profits, would be to simply make the tax be absurdly high (like 99.9999%) for HTC and then converge it to normal according to the time one has held a particular stock before sale. This way you can always make profit (if there's profit to be made), but even the gambler would be interested in the long term health of the general economy, and of the business in particular they have invested in.

A week?! A month?!!
How do you propose to compensate me and others for the loss of value and liquidity created by your arbitrary market rules and centrally controlled economy? Will you or the government either put up part of the purchase price to compensate for your partial control, or allow me to write off losses caused by the proposed rules?
What's wrong with me immediately changing my mind after a trade?

How about instead a Ultra-Short Capital Gains tax rate at 100%. Trade as fast as you want but unless you hold it for a week or month, you pay out all your profits. You're as liquid as you need to be. You don't have to ban it, just de-incentivise it.

It will work. The majority of HFT's illicit profits accrue from speed arbitrage *between* the exchanges, not from a speed advantage at any particular exchange. A co-located HFT server at an exchange sees an order, and, in anticipation of that order representing a larger order that can't be filled in full at that same inside "best" price at that exchange, trades ahead of the order by sending a buy/sell order to other exchanges faster than the original buyer/seller can, resulting in a riskless vig for the HFT trader.
By delaying orders on all exchanges by 500ms, the benefit of early-access to incoming orders on any particular exchange is eliminated because all the exchanges will have 500ms of order price discovery incorporated into their SIP, the consolidated price representing the aggregate of the best prices for all the exchanges.

Quick explanation of HFT, at least, the form that hit the headlines recently. Suppose you have two exchanges, let's call them VAMPIRES and ANGELS (to pick names at random, I mean, if I've accidentally used names reminiscent of a real exchange I apologize as that's not my intention...)

A legitimate trader wants to buy 1000 shares of X at $10. It sees 500 on VAMPIRES, and 500 on ANGELS. So it immediately, simultaneously, places both orders.

Well, it turns out VAMPIRES is kinda rigged. They've made sure their connections to every trader are the fastest possible, whereas ANGELS just uses regular telco connections. They advertise this as a feature, and everyone believes them, but it turns out the founders of VAMPIRES have a hidden agenda. They've made sure they have a fast connection to VAMPIRES, and arranged with the phone company to have an equally fast connection to ANGELS. After "resigning" from VAMPIRES to give the appearance of being uninvolved, they monitor all transactions on VAMPIRES. As soon as they see all shares for X have been told at $10, they immediately place an order for all shares of X at $10 on ANGELS, correctly deducing that the only reason someone would buy ALL the shares of X on VAMPIRES is because they're buying ALL the shares on ALL exchanges for X for $10.

Because they have a fast connection to both exchanges, the HFT traders can see the trade that just happened on VAMPIRES and successfully transmit their trade to ANGELS in less time than it takes the legitimate trader's trade to be transmitted to ANGELS.

So what does the 500ms delay do? Answer: it makes it impossible to see the trade that occurred on VAMPIRES before the accompanying trade has been received by ANGELS too. The founders of VAMPIRES sees the trade 500ms+latency after it was sent by the legitimate trader. They can place the order on ANGELS anyway, but their trade will arrive 500ms+theirlatency-legittrader'slatency on ANGELS so it'll arrive afterwards and the legitimate trader will get their shares unmolested.

An alternative, but it's not terribly reliable, is for the legitimate trader to determine the latencies to each exchange and then send each order with an appropriate delay to make sure they arrive at about the same time at each exchange. It's not 100% fool proof, but RBC was able to get around HFT traders using the technique.

If there's nothing wrong with HFT then this would be a pointless change. I have to agree that a slow increase might be wise - we've already established that the majority of trading by volume is by HFT algorithms, which by their nature are incapable of exercising common sense, and have in fact caused massive swings in the market simply through their emergent reactions to random noise and each other.

If the whole point is to be x microseconds ahead of the other guys wouldn't a 500 ms delay simply mean the exact same game would become 'after 500 ms, still be a few microseconds ahead of the other guys'.

I would imagine a more effective approach would be to process trades 4 times per second. A request for a trade always gets processed in the slot after the next slot (meaning no less than a 250 ms delay, but no more than 500 ms delay). Within a given slot of trading activity, randomly shuffle the requests so that someone beating someone else by less than 250 ms doesn't actually affect things.

One of the major problem is when an HFT sees your making a trade in exchange A, it assumes you're going to be hitting the other exchanges for similar trades and beats you to them. I don't see how putting a delay in a trade at a single exchange would help.

Well my thought would be that multiple exchanges would implement the same scheme. In that case, someone coming in as late as 249 milliseconds after you has a 50/50 shot of being ahead of your trade anyway. Yes, one exchange wouldn't be enough, but the more exchanges that did the scheme, the less this would help.

This solution does more or less solve that problem as well. Nobody but the exchange will have a view of the orders for at least a 250ms but possibly as long as a half second under the parents scheme. That will anyone selling or buying in enough volume to be a market mover on anything but the smallest of micro caps likely has the technology to submit orders to each exchange they mean to trade on inside that window where the HFT guys will not have the opportunity to do any new price discovery.

In this case, the question is 'what's the downside?' If HFT isn't really a problem, then what harm would it be to level the playing field to 250 ms or whatever quantums? If HFT is a big deal, then this would fix it. If it is not, then it wouldn't change things much.

Certainly some financial institutions are heavily investing in HFT relevant schemes, so they at least believe that HFT impact can be significant.

They could also use cooldowns rather than a delays. HFTs will then put themselves at a disadvantage if they are constantly making trades because they will have to wait the whole cooldown before they can react. Meanwhile, everyone else will have no delay since their last trade was long before (at scale).

Agree, if it's a *delay* it does nothing. If it's an *interval* it would help. And I think a 5sec interval would be good. That would eliminate all technological competition, putting the servers in the exchange basements with hot-swappable, consumable CPUs and bleeding-edge network gear on par with a RasPi on the other side of the planet.

Won't work. How do you suppose trades actually go through and prices get discovered? Trading and price discovery sort of works like an auction. An auction is not effective if you randomly scramble the order the bids come in.

I say like an auction because there's not actually an auctioneer, it's more complicated than that. Some people do what's called passive execution. They put a quote out there that says "I'll buy XYZ at $x and sell at $y." Other people do what's called aggressive execution. They see

Before outlawing it in a pique of jealousy at some perceived cosmic injustice, is this kind of trafing actually a problem?

If the real danger is a scenario where computers issues millions of trades in a few seconds in some feedback loop watching each other and making predictions, a 500ms slowdown could be just what the doctor ordered, slowing things down by 3-4 orders of magniude.

I was first thinking that there should be a minimum holding period of five seconds, but I'm not sure that's technically feasible. How about only delaying sell orders? That would effectively create a minimum holding period.

This might work or just have the delay a random amount between 1 and 5 seconds but Ithink the better solution would be to just increase the transaction cost as presumably thisis putting a fair amount of load on the system as well.A simple transaction cost of maybe 1cent per share wouldn't affect a normal buyer at all,would bring in money to the exchange but would put a huge damper on buying and sellingthousands of shares per second.High Frequency Trading is kindof like email spam. The only do it because it

Well, it would at least put a damper on HFT schemes where the profit is less than 1 cent. How common is that though? A HFT jumping in the middle of a 5-cent transaction discrepency still stands to make 4 cents.

1 - 5 cents is the bread and butter of HFT. The fact that it's only < 10 cents that nobody thinks it's that big a deal.

So it sounds like the transaction fee might need to be closer to 10cents per share.HFT exists because the current (transaction fee + transaction cost) is too low. Just like with spam, trying toartificially increasing the transaction cost for an electronic transaction is bound to fail but unlike spamincreasing the transaction fee is easy to implement.I don't think you want to eliminate all arbitrage as some can be good for the market. You just want toeliminate the fractional cent arbitrage that doesn't ben

The problem isn't that it cost billions, the problem is that "average" people cannot accrue the benefit of that profit, directly. And this seems unfair to the "fairness police".

The issue is, that this liquidity has already saved billions of dollars because it is liquid. Nobody is complaining about the increased efficiency of the market (liquidity is efficiency). If you want to play this game, buy the equipment to play it. There are more fundamental issues with Stock Trading IMHO, that HFT is not one of them

There's no increased liquidity; Buyer and seller(s) were already engaged in a transaction (had reached Exchange A, not Exchange B), and all orders would have been fulfilled by the Exchange B once the order arrived there (Gross simplification, I know). Someone with a faster link between A and B buying all of $Stock at B and selling for slightly higher before the order from A arrives isn't adding liquidity. If a person did it, it would be called front running [wikipedia.org] and it's illegal.

A pause just creates an arms race. Taxation is a good antidote to accumulation of money without creation of wealth.

And don't give me any of the liquidity bullshit - investment, to be rational, must be a long term exercise. And there's no reason why market makers can't charge less without the HF bullshit - hell, public or private sectors could create a non-profit market maker.

Or an even simpler solution, extend the laws that make a human doing this illegal to cover automated systems too. HFT is only 'legal' because they can scream 'but it is being done by technology!', but as various court cases with file sharing have shown, assuming the judge feels like it, novel technological implementations are not a panacea against legal repercussions. Unless of course you have good lawyers, weak regulation, and an industry that is profiting from the transgression, in which case a judge might indeed magically find that the technicality is enough to get them off.

There's a gripping article over at the NY Times (adapted from a just released book) that explains very well the pitfalls of HFT, where the problems are mostly due to the haves and have-nots, just like in most things. The article is at http://www.nytimes.com/2014/04... [nytimes.com]

Not having a level playing deck in an exchange is a major problem for the correct functioning of said exchange.

yeah, but the exchanges can really profit from inertia here. They only have to be fair enough for investors to not leave for exchanges with less usage on them. Kinda like PayPal, no one likes them, sellers and buyers know the company is corrupt, but it is where the buyers and sellers are so if you want access to other people using it you have to use it to. PayPal profits off this as long as they keep their corruption low enough to not cause a mass exodus. Same with the exchanges, investors know they are

The Australian Financial Review today reported that ASIC had told the inquiry into Australia's financial system chaired by David Murray the regulator would consider introducing a half-second clamp on trades to remove HFT's speed advantage.

HFT work by seeing the order in one exchange at one price, and the same thing is available in another exchange for a slightly different price, simultaneously buy in one, sell in another and pocket the difference. Plain arbitrage, something Commander Vanderbuilt apparently did back in the days when news traveled on horseback during the day time. And he traveled at night in his sailing ship and raced ahead of the news, dumping bonds from bankrupt New York corporations.

These exchanges communicate the prices between themselves and take slightly longer than 350 milliseconds for the news to travel between exchanges. These big trading companies have faster access to both exchanges and are able to act on them. Would it be enough to delay all orders by 0.5 sec? Even if one trading firm sees the price difference, before it could act on it, the news would have traveled and it could no play micro second arbitrage.

This is my understanding. It might mean any trader must hold the instruments for 0.5 sec before trading it again. Not really sure what the article means by clamp.

Not really. That used to be possible but there are now so many people doing it that there aren't sufficient arbitrage opportunities to make enough money to cover your costs.

Instead it's more like this:

Consider a hypothetical stock that is worth exactly $1.

What used to happen was that the market makers would have a bid/ask of 0.95/1.05. (For a modern market that still trades with those sorts of spreads, look at gold metal. For small investors, a 5-10% bid/ask spread is fairly typical)

Again, you have an 'average' 3 second baseline to compete against. What you really want to do is accumulate trades into a queue, have said queue stop taking new trades for some period of time, then process that queue in random order. Then there truly is no difference whatsoever between trades getting in within a quantum of the trade processing slice.

I wonder how hard this proposal by the Australian Securities and Investment Commission (ASIC) will hit makers of Application Specific Integrated Circuits (ASIC) designed to evaluate quotes and request trades.

Instead of just playing the numbers, why don't governments stop the manipulation entirely? You buy a stock, you hold it for 3 DAYS. The market adjusts for the sales and purchases instead of being artificially stimulated. The microsecond barons have to do some REAL work instead.

This.All I keep seeing is proposed delays in seconds or minutes at best.Trading shares is effectively gaining and selling ownership of a company.There is no valid case for wanting to own part of a company for mere seconds.There is no benefit for most companies either, so why do they allow an exchange to permit these risks to their business?Are there no exchanges that enforce a "minimum ownership duration" rule for the companies they list?

> why do they allow an exchange to permit these risks to their business?

How exactly does frequent trading present risks to a business? The only impact stock value has on a company is with regard to its credit worthiness and resistance to hostile takeovers, and short-duration trades are unlikely to have a long-term impact on stock value. Perhaps there could be a trader just sitting around waiting to buy up controlling stock in Company X, but they'd have to be pretty sneaky to avoid tipping

3 Days is a looong loooong time. I don't think minimum holding periods are fair to anyone, at least not above intervals of more than a few seconds. At three days imagine this situation.

On the 1st Joe buys 100 shares of $OIL_COMPANY at $10 a share. On the 3rd Jim buys 100 shares of $OIL_COMPANY for $11 a share. On the night of the third Joe and Jim are sitting at the bar watching the news, and discover $OIL_COMPANY just had a tanker run aground and its probably going to destroy a major fishery, the damag

High frequency trading isn't the issue. The banks are the real "insiders", and are pointing fingers at small, high frequency prop shops to deflect attention from themselves, and to get back to the bad old days when they could really gouge their customers with wide spreads.

High frequency traders make their money by having better pricing models, narrowing spreads in the market, and being able to execute and then get out of a position quickly to lock in their profits and eliminate risk. The banks like to be the middleman, with wide spreads, so that they can pocket the difference.

The net result of high frequency traders is that the rest of us can get a stock much closer to their actual value (due to narrow spreads). Yes, the high freqency traders make good money by selling the stock $0.005 off the "real" value to me and then immediately getting out of the position by reselling it a millisecond later and locking in that $0.005 profit, but I have only paid a premium of $0.005 instad of the $0.35 or worse the banks would love to gouge me for (and used to, a few short years ago).

We get rid of high freqency trading and we'll be back to the bad old days, when the real insiders really did gouge us, and we all paid far too much for our investments, and were able to sell at far too little, with the likes of Goldman Sachs pocketing the enormous difference.

As for the front-running nonsense on 60 Minutes, that's always been illegal (contrary to what we're being told), and it is not at all how high frequency trading works. If someone was in fact doing that, then they're in a whole world of hurt with the SEC (and rightly so), but this entire exercise appears much more like a distraction: blame small outsider firms who've made the marketplace more effecient and tightened spreads for problems created by corruption within the big banks, and hope no one notices...at least until the next bank-induced crash.

As for the front-running nonsense on 60 Minutes, that's always been illegal (contrary to what we're being told), and it is not at all how high frequency trading works. If someone was in fact doing that, then they're in a whole world of hurt with the SEC (and rightly so), but this entire exercise appears much more like a distraction: blame small outsider firms who've made the marketplace more effecient and tightened spreads for problems created by corruption within the big banks, and hope no one notices...at least until the next bank-induced crash.

This is absolutely not illegal. Here's how HFT gets one of its profit lines:Large trades often spread across multiple exchanges. Buy 30,000 shares here, 15,000 there, etc... The regular broker submits one purchase and it gets distributed across exchanges. As soon as it hits the first exchange, say after 30ms, an HFT algo picks up on the trade and assumes that it'll happen as well on the other exchanges. So it races ahead and front-runs in the other exchanges before the regular distributed trade has a chance

Well, technically HFT is illegal, it is just a matter of if a judge will agree hold them to it or not. Generally courts have found, well, at least for small fries, novel technical solutions do not make something legal when doing it by hand would not be. HFT is automated front running, nothing more.

Wrong. HFT trader will bid 1.00 and sell, then as your trade comes in it won't be executed and you'll be forced to sell lower, say 0.98, which he'll gladly buy back from you. He got a completely unnecessary spread out of your pocket.

>being able to execute and then get out of a position quickly to lock in their profits and eliminate risk.

If they're not carrying any risk, then by what right to they lock in profits? The entire point of a stock exchange is to allow people to carry risk in exchange for profits. HFTers are simply gaming the system.

There is no earthly reason for these commodities and stocks to trade hands faster then that. What are you doing?

The primary issue here is that human beings can't keep up with it. And that's extremely dangerous. If the computer gets confused then it can smash the market before anyone can do anything about it. But if its doing its thing in ten second pulses then you can likely stop it.

The secondary issue is that the market is very unfair with high frequency trading because it gives people with a better connection a huge advantage over everyone else. Its like having a time machine. Its the insider trading of knowing what the price is going to be in.2 seconds.

Pulse the system and most of that advantage goes away. Sure, your might get your order in faster if your system placed it faster but there's less information to react to... fewer iterations of the price to buy or sell against. You buy and sell on the pulse.

The problem after this will be the dark markets... the in house trading and between house trading of stocks, bonds, futures, etc. And putting any rules on the market tends to encourage the houses to use the dark markets more and more.

Which is fine. You control that by putting laws on the houses that they can't accept certain types of money if they're doing a lot of in house trading. The money you don't let them have is the pension money. The mortgage money. The big safe pots of money that the people give to the market makers largely to keep safe and grow at some reasonable rate.

The big houses need that money or they can't make the big buys. They can't leverage it to bend markets. And that means they have to choose... do they want to go big into the dark market or have access to the pension money? Because you make it a choice and they'll mostly choose the pensions. Which means the ones that will go after the dark market will be the smaller guys... the hustlers. And whatever they might or might not do, without the liquidity of the safe money... they won't really matter.

Add a 1% tax to all stock SELL orders where the seller has held the security less than a day.Lower the tax to 1/2% for SELL orders where the seller has held the security for less than a week.Lower to 1/4% for securities held less than a year.

This scheme would:a) Raise a large amount of revenueb) Constitute a 'use tax', kind of like a road toll.c) Only affect people engaged in short term trading (e.g. wall street manipulators)d) Act as a brake to prevent market volatility (e.g. the flash crash)e) Be immediately shot down by Teapublicans asshats, so it won't happen.

I don't agree with basing the tax on time held. That's just an extra pain to audit. A simple low flat tax on each trade will already stop HFT. Even with a tiny tax, trading multiple times per microsecond will add up very quickly.

What really annoy me with HFT, besides not being "fair", it that it as a cost and that the society doesn't benefit from it.

Building a stock exchange with top-notch computers if fine, since there is a need fulfilled here for our society.

But building new warehouses as close as possible to stock exchange computers to house top speed fiber connected computers, just to lower the delays from 600ms down to 10ms or so, to allow HFT, is a waste of resources.
No one needs that, it's just a smart way to build a sucking vampire over information systems. And this cost is always somehow reflected to society.

One big bank of my country paid a lot to move all its crucial infrastructure abroad, in such new buildings, to be able to compete in HFT.
Who's paying for those efforts? The company, the bank, instead of doing something more useful to society (investments to improve their services, etc).

It really is since they're potentially inflating the prices paid for equities.. not only by the individuals but their pensions funds. HFT shops open and close with 0 positions.. they do not hold stock past the close of business. They are simply skimming cents from transactions and that's costing people real money over the lifetimes of their investments. The stock exchange has lost all sight of it's original function to raise capital for growth investment.

a) resolution in 5 second trade blocks - don't resolve trades with bid/ask when they arrive. Accumulate 5 seconds of incoming bid/ask then resolve. Pass the remaining unresolved to the next interval.b) Arrival time +10 to 20 seconds random interval -> fuzzy bin boundaries and fixed "lag". Not guaranteed to get simultaneous orders into the same trade bin. Keeps trading honest and less able to be gamed.c) fixed lag and binning means no insta-cancelling orders.d) n

According to last years ACM issue on HFT algorithms, trades already presented in time-tic goups. Just currently much shorter than you propose. The ACM articles discussed tricks to jump to the head of a group/queue.

HFT also manages the randomness in order presentation. At millisecond resolution TCp/IP collisions cancelations become a serious issue. The smae ACM issues discusses how to game this.

Evey constraint you popose algorthmically will probably be beaten by another clever computer executed alg

I'm an active trader, on the order of about a dozen trades a month, not a "day trader" or a high frequency trader. I'd gladly pay a nickle a trade in tax, with the proceeds to go to better regulation. It would also have the effect of seriously hampering the high frequency traders business model, which is a great side effect IMHO.

this article explains in depth what the problem is. the SEC has now been alerted to the problem, and is investigating. the people who found the issue believed originally that this was deliberate, but it actually just turned out to be a systemic problem of the speed differentials between different routes that high-frequency trades come in at.

what they originally discovered was that they could see a price on a screen, but the moment that they put in the bid to a number of brokers, the price would DISAPPEAR. they thought that this was deliberate, that someone was scamming them: it turned out that this wasn't true, but it took a couple of years of investigation to find out. what they did was they put in *individual* bids *directly*, and found that they were accepted. they then investigated various combinations, introducing delays into the bids, and found, amazingly, that it was down to the *time of arrival at the exchange* of their bids as they were sent via numerous brokers.

so it was only when they invented a tool (which they called "Troy") that *deliberately* introduced networking delays, such that the bids would (as best they could manage) arrive within milliseconds of each other at the exchange, that they managed to trade successfully.

if however any one of those bids happened to go via a different ISP, or a different router, or any other random combination, then the bids would *FAIL*.

the problem it turns out is that these delay effects are well-known. most of the money in high-frequency trading is therefore made by seeing a slightly slower broker's prices, then putting in an undercutting bid *knowing full well* that the other broker has a slower network. and this aspect of high-frequency trading is what is currently under investigation by the SEC.

*this is why the introduction of networking delays is so absolutely important*.

the people who discovered this phenomenon basically had to set up their own independent exchange in order to solve the problem. they needed to introduce a delay of 350ms as a way to make things fair for everyone. they did this by basically putting in 38 miles of fibre-optic cable in a shoe-box in the basement of the server farm that they leased.

it turns out that once investors discovered this, they began *specifically demanding* that their trades *exclusively* be brokered through this new exchange that had this 350ms shoe-box delay. it actually caused a lot of embarrassment for a number of brokers and trading houses because the brokers were explicitly disobeying their client's instructions, because the brokers didn't understand how important this really is.

anyway: you really have to read that article (or the book) fully because it's quite complex, and it's basically an inherent flaw down to the fact that the internet (TCP/IP) is routed randomly, thus introducing gross unfairness that has become the subject of intense investigation, very recently.

Ah, but we're not necessarily trying to lock out computer trading, just remove its massive advantage over human traders. I would bet that a mechanical turk-based captcha bypass would take considerably longer than a human trader typing in the captcha personally. Of course that might just mean the HFTers employ rooms full of captcha-typers, but you've still removed the ability to react on millisecond timescales.

Because this is basically what's happening, is that these machines are taking advantage of a security flaw that allows them to see a transaction before it's complete

No. They see the completed transaction at one exchange for X shares, and assume you're doing the same thing at the other exchanges. They just race there faster and preempt your transactions that are on the way.

And they also consistently post fake offers that they retract in order to analyze the market appetite.